Rationale

Standard & Poor's Ratings Services lowered its long-term rating to 'AA+' from 'AAA' on various long-term bonds issued for The Nemours Foundation. At the same time, we assigned a 'AA+' long-term rating to the $127 million series 2009A revenue bonds issued by Orange County Health Facilities Authority, Fla. for Nemours. The rating outlook on all debt is stable.

The downgrade reflects our opinion of the foundation's significant debt and business risk. We understand that Nemours will use the series 2009A bond proceeds, primarily to finance the construction of the new Nemours Children's Hospital in Orlando, Fla. The action also incorporates our view of the increasing business risk represented by the construction of a new hospital in a competitive health care market.

The 'AA+' rating also reflects our view of Nemours' general obligation pledge, under a loan agreement with the authority, supported by:

A long operating history, especially the Alfred I. duPont Hospital for Children, as well as multiple clinics;

Good market position as a provider of pediatric health care services at both its Delaware and Florida locations;

Adequate liquidity, in our opinion, with 312 days' cash on hand and investments (including temporarily restricted net assets of $328 million) and 1.7x coverage of $374 million pro forma debt from total cash and investments (not including any assets of the trust);

A manageable level of debt service, at 3.5% of fiscal 2008 adjusted operating revenues, and good debt service coverage of 3.4x maximum annual debt services (MADS) from operations; and

Nemours' role as the primary and perpetual beneficiary of income from a related trust -- the Alfred I. duPont Testamentary Trust, which provides Nemours with a 3% distribution of the trust's market value every year, and held assets of $3.4 billion on July 31, 2009.

Nemours is an operating foundation with two major areas of focus -- clinical operations and services and health care promotion -- with clinical operations in both Delaware and Florida. In addition to an existing 200-bed children's hospital in Wilmington, Del., Nemours operates a system of clinics in various locations in four states, and various health care promotion and information services such as KidsHealth, a web-based information platform.

According to management, Nemours engages in a limited amount of biomedical research in pediatric medicine with approximately $8 million of sponsored research in 2008, and provides continuing medical education. Net patient service revenue was $496 million and $453 million, respectively, of fiscals 2008 and 2007 operating revenues of $675 million (adjusted to exclude realized and unrealized investment losses of $10.5 million) and $635 million. The foundation's other major source of revenue is the distribution from the Alfred I. duPont Testamentary Trust, which amounted to $137.8 million and $132.4 million, for fiscals 2008 and 2007, respectively. Management has informed us that the trust distribution will be reduced to $94 million for fiscal 2009 as a result of a reduction in the trust's value from $4.6 billion on Dec. 31, 2007, to $3.1 billion on Dec. 31, 2008. The foundation receives a 3% distribution from the trust every year. Historically the distribution occurred once a year, but beginning in fiscal 2010, the trust will provide the distribution quarterly to improve cash flow.

According to management, the foundation is issuing approximately $327.8 million of revenue bonds to partly finance the construction of a new 95-bed children's hospital in Orlando. A portion of the project will also be financed with a special distribution from the Edward Ball Fund, estimated at $80 million.

The Nemours Children's Hospital will also include a new emergency department, clinic space, doctors' offices, and diagnostic areas. A portion of the bonds will be issued as fixed-rate debt, $150 million will be issued as variable--rate demand bonds secured by a Bank of America letter of credit, and $50 million will be issued as variable-rate revenue bonds, with liquidity provided directly by Nemours. Maximum annual debt service (MADS) on the bonds is estimated to be $23.7 million. Income available for debt service from fiscal 2008 operations provided good coverage, in our opinion, of 3.4x MADS. The foundation has no other plans to issue debt in the near term.

According to management, it will use a portion of the series 2009A bond proceeds to refinance a line of credit, which it used to begin the construction process in Florida. Nemours' cash and investments provide approximately 1.0x coverage of fiscal 2008 operating expenses and 1.7x pro forma debt of $374.1 million. MADS is manageable in our opinion, at 3.5% of fiscal 2008 adjusted operating revenues. While the assets of the trust are not included as part of Nemours' general obligation pledge, they provide a substantial resource to management. Including the trust, total unrestricted assets and investments covered fiscal 2008 operating expenses by 5.6x and total debt by 9.5x. Five of the six current trustees of the trust also serve as member directors of Nemours.

Nemours has a strategic objective of being recognized as a leading children's health care system in the top 5% of institutions for patient satisfaction and quality outcomes. Management indicates that the construction of a new hospital will further its strategic objectives.

Outlook

The stable outlook reflects our expectation that operating performance should be relatively unchanged during the next two years, there likely will be no additional debt needs, and financial assets likely will not be substantially diluted to market performance.

Good Operating Performance And Balance Sheet

Operating margin in 2008 was, in our opinion, good at $40.2 million, or 6.0% of total adjusted revenue, down from a margin of $64.11 million in fiscal 2007, or approximately 10% of total revenue. The foundation closed its fiscal year ended Dec. 31, 2008, with total assets of $1.13 billion, and 312 days' cash on hand (including temporary restricted net assets). Including the expected disbursement of $80 million cash from the Edward Ball Fund in 2013 and 2014, we expect cash to debt and days' cash on hand to drop. Debt to capitalization was very low in our opinion, at 20% on Dec. 312008 (not including the Ball Fund) and we expect it to rise to 32% with the new bonds. Including both the trust and the fund, cash to debt is in our view very strong at 10.7x. Nemours' cash alone covers pro forma debt at 1.7x. Days' cash on hand and investments, including the trust assets, is more than 2,000 days, surpassing the 141 days' cash on hand represented by Nemours' unrestricted cash, investments, and assets limited as to use. We compared the Nemours' balance sheet to both operating foundations and stand-alone children's hospitals and in our opinion, the 'AA+' rating is consistent with institutions we rate in the 'AA' category.

The foundation recorded $675 million (adjusted) and $635 million of operating revenue for fiscal 2008 and 2007, respectively. Net patient revenues were $496 million and $453 million, transfers from the trust were $138 million and $132 million, respectively, and a distribution from the Edward Ball Fund (included on the Nemours' audit as temporarily restricted net assets) was $14 million and $12 million, respectively. On Dec. 31, 2008, Nemours' liabilities of $383 million included approximately $69 million for a self-insurance reserve and $125 million of liabilities for pension benefits. Nemours had only $106 million of debt outstanding on Dec. 31, 2008. Of the total net assets of $774 million, approximately $412 million was unrestricted, and $328 million (attributable to the Ball estate) was temporarily restricted. Nemours intends to use approximately $80 million of temporarily restricted net assets toward the construction of the new hospital. On a pro forma basis, a majority of Nemours' debt will be in the form of variable-rate demand bonds.

The inclusion of the sizable distribution from the trust ($138 million in fiscal 2008 and an estimated $94 million in fiscal 2009) allows Nemours to achieve balanced operations each year. The foundation tells us that operations will likely result in a 5.5% operating margin in fiscal 2009. Management reports that it expects fiscal 2009 operations to include an increase in net patient revenue from $496 million to $546 million, and despite a reduction in trust distribution, an improved operating margin of $38.3 million.

The Nemours Foundation Financial Statistics

--Fiscal year ended Dec. 31--'

2008

2007

2006

2005

Income statement and cash flow

Operating revenue ($000s)

674,812

622,039

567,145

537,668

Total expenses ($000s)

634,620

570,936

553,532

523,324

Operating income ($000s)

40,192

51,103

13,613

14,344

Operating margin (%)

6.0

8.2

2.4

2.7

Net nonoperating revenues ($000s)

6,087

12,406

11,706

8,747

Excess income ($000s)

46,279

63,509

25,319

23,091

Excess margin (%)

6.8

10.0

4.4

4.2

Change in net assets ($000s)

(226,088)

53,868

85,768

48,428

EBIDA/total revenue (%)

11.8

14.9

8.9

8.3

Cash flow/total liabilities (%)

20.4

30.9

17.8

15.9

Capital expenditures ($000s)

103,376

59,815

49,176

75,764

Debt

Net available for debt service ($000s)

80,213

94,519

51,507

45,480

Maximum debt service ($000s)

23,700

23,700

23,700

23,700

Maximum debt service coverage (x)

3.4

4.0

2.2

1.9

Maximum debt service-to-total revenue (%)

3.5

3.7

4.1

4.3

Balance sheet

Unrestricted cash and investments ($000s)

232,574

221,107

209,070

196,674

Restricted cash ($000s)

397,406

583,459

576,448

524,913

Unrestricted days' cash on hand

141

148

144

143

Unrestricted cash/debt (%)

218.4

311.9

233.5

214.9

Cushion ratio (x)

9.8

9.3

8.8

8.3

Net fixed assets ($000s)

397,375

321,304

274,116

254,373

Long-term debt ($000s)

106,479

70,880

89,538

91,514

Unrestricted fund balance ($000s)

411,781

478,624

443,505

414,197

Debt/capitalization (%)

20.5

12.9

16.8

18.1

Average age of plant (years)

9.5

10.1

9.8

10.1

Temporary restricted assets

328,229

487,498

470,338

413,878

Investment Allocation And Return

Historically, Nemours and the trust have adopted moderately conservative investment and debt practices, in our opinion, and the two long-term pools are managed by the same investment office. On July 31, 2009, the trust's substantial assets of more than $3.4 billion were invested in a diversified portfolio with what we consider a moderately aggressive mix of 37% global equities, 18% private capital, 16% absolute return strategies, 15% fixed income, and 14% real assets. The Nemours' long-term pool of $371 million was similarly invested, with a somewhat higher concentration in cash reserves. For the 12-month period ended July 31, 2009, the trust's investment performance was a negative 14.4%.

The trust's chief investment officer is also Nemours' chief investment officer. Despite the recent reduction in the market value of assets, the distribution to Nemours still increased from $79 million in fiscal 2003 to approximately $94 million in fiscal 2009. The trust recorded a substantial unfunded commitment to private partnerships of approximately $974 million on Dec. 31, 2008.

Health Care Operations

The Nemours' health care system includes 25 delivery sites in four states, with one freestanding children's hospital in Wilmington, Del. The Alfred I. duPont Hospital for Children (AIDHC) produced approximately $287 million of revenue in fiscal 2008 and an operating margin of approximately $28 million. We consider the 200-bed hospital's market share in the Delaware Valley primary service area of 36% to be strong, compared with 17% for Children's Hospital of Philadelphia, its closest competitor. According to management, emergency room visits increased in each year from 2006-2009,with 44,069 expected visits this fiscal year. It expects inpatient days of nearly 45,000 in fiscal 2009. Management intends to engage in a $200 million expansion and renovation project over the next six years, the costs of which will be funded from cash flow. The payor mix for the Delaware Valley operations is weighted heavily to managed care (61%), with Medicaid managed care at 24%, traditional Medicaid at 10%, and self-pay at 5% of net patient revenue.

In contrast to the performance of AIDHC, the clinic operations in both Delaware and Florida produce a deficit. According to management, Nemours Children's Clinic of Delaware produced $146 million of revenue in fiscal 2008, and a $10.4 million deficit. The Nemours Children's Clinic of Florida produced approximately half the revenue of the Delaware Clinic ($77.8 million) and operated with a substantial deficit of $46.5 million. However, utilization at the clinics continues to increase, and outpatient visits in 2008 grew by 5.4% to total nearly 240,000 visits. The Florida payor mix is also weighted heavily toward managed care at 65%, Medicaid managed care at 18%, traditional Medicaid at 6%, and self-pay at 11% of net patient revenue.

Management expects The Nemours Children's Hospital to open in 2012 and expects the primary service area to be Orange, Osceola, Seminole, and Brevard counties. Management projects that operations will not produce break-even operations in Florida until several years after the hospital opens. Additional business risk will be a function of competition from two sizeable competitors, including Orlando Health (A/Stable), which operates the Arnold Palmer Hospital for Children and the Winnie Palmer Hospital for Women and Babies, and Florida Hospital, part of Adventist Health System Sunbelt (A+/Positive), which operates Florida Hospital for Children. Across the entire enterprise, management projects that operations will produce a modest operating margin of 2.3% in fiscal 2013, the first full year of hospital operations in the new facility.

Copyright � 2009 by Standard & Poor's Financial Services LLC (S&P). All rights reserved. No part of this information may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of S&P. S&P, its affiliates, and/or their third party providers have exclusive proprietary rights in the information,including ratings, credit related analyses and data, provided herein. This information shall not be used for any unlawful or unauthorized purposes. Neither S&P, nor its affiliates, nor their third party providers guarantee the accuracy, completeness, timeliness or availability of any information. S&P, its affiliates or their third party providers and their directors, officers,
shareholders, employees or agents are not responsible for any errors or omissions, regardless of
the cause, or for the results obtained from the use of such information. S&P, ITS AFFILIATES
AND THEIR THIRD PARTY PROVIDERS DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event
shall S&P, its affiliates or their third party providers and their directors, officers, shareholders,
employees or agents be liable to any party for any direct, indirect, incidental, exemplary,
compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses
(including, without limitation, lost income or lost profits and opportunity costs) in connection
with any use of the information contained herein even if advised of the possibility of such
damages.

The ratings and credit related analyses of S&P and its affiliates and the observations contained
herein are statements of opinion as of the date they are expressed and not statements of fact or
recommendations to purchase, hold, or sell any securities or make any investment decisions.
S&P assumes no obligation to update any information following publication. Users of the
information contained herein should not rely on any of it in making any investment decision.
S&P's opinions and analyses do not address the suitability of any security. S&P does not act as
a fiduciary or an investment advisor. While S&P has obtained information from sources it
believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or
independent verification of any information it receives. S&P keeps certain activities of its
business units separate from each other in order to preserve the independence and objectivity of
each of these activities. As a result, certain business units of S&P may have information that is
not available to other S&P business units. S&P has established policies and procedures to
maintain the confidentiality of certain non-public information received in connection with each
analytical process.

S&P's Ratings Services business may receive compensation for its ratings and credit related
analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the
right to disseminate its opinions and analyses. S&P's public ratings and analyses are made
available on its Web sites, www.standardandpoors.com (free of charge) and www.
ratingsdirect.com (subscription), and may be distributed through other means, including via S&P
publications and third party redistributors. Additional information about our ratings fees is
available at www.standardandpoors.com/usratingsfees.

Reproduction and distribution of this information in any form is prohibited except with the prior written permission of Standard & Poor's. Standard & Poor's does not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and is not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such information. STANDARD & POOR'S GIVES NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. STANDARD & POOR'S shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of this information, including ratings. Standard & Poor's ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the market value of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Please read our complete disclaimer here.